A Big Buying Opportunity in Big Oil

When the markets began this week with a bungee jump -- a plunge, followed by a temporary bounce -- I became involved in a chat about the $35 billion earned collectively last quarter by the five largest members of Big Oil.

The finance professional with whom I was chatting sneered about the admittedly hefty sum: "Unconscionable." It's a term I completely reject, since it implies overcharging. Indeed, let's improve our perspective by comparing a pair of radically different companies, ExxonMobil (NYS: XOM) and McDonald's (NYS: MCD) . In its latest quarter, Exxon earned $10.7 billion, while the golden-arched purveyor of Big Macs reported slightly above $1.4 billion on its bottom line.

Margins mean moreDig deeper, however, and you'll find that while Exxon manages to translate about $0.08 of every revenue dollar into earnings, the comparable figure for McDonald's is about $0.20 per dollar. And while both companies operate in such garden spots as Russia and Nigeria, for instance, there's no evidence that McDonald's employees have had to endure Russia's "hellish" Sakhalin Island -- an Anton Chekhov label -- where Exxon has toiled for years. Nor have the fast-food flippers been attacked by angry Nigerian tribesmen, an all-too-frequent occurrence for oil companies operating in the Niger Delta.

Hopefully, having cut Big Oil some slack regarding the appropriateness of its profits, our next question involves whether its members constitute promising investments for Fools with a taste for energy. My candid contention is that, in a world of spreading political upheavals, resource nationalism, and rapidly increasing technological challenges, they certainly do. Quite simply, the major integrated companies are able to benefit from geographic dexterity to reduce their assets in areas of (perhaps politically) difficult operations -- e.g., Venezuela -- in favor of concentrations in more favorable locations, such as Australia.

A cheery seasonIf you're in agreement thus far, the final (and key) task is to identify which member of the group appears to be most compelling. Without beating around the bush, my first choice goes to the group's big enchilada, ExxonMobil. Not far behind, however, is Chevron (NYS: CVX) , itself a well-managed company that is adding to its own positive record virtually around the world. Beyond that, I'm intrigued by a vastly improved Royal Dutch Shell (NYS: RDS.B) .

How have I arrived at my rankings? Let's begin by looking briefly at the results just reported by the big integrated companies. As you likely noted, Exxon produced a solid quarter, including a 41% year-over-year profit increase, while Chevron turned in a slightly higher 43% earnings hike. Exxon, however, was able to raise its production level by an impressive 10%, while Chevron's output slid by 2.2%, a result of production-sharing arrangements with foreign governments that trimmed the company's share of production as oil prices increased.

Meanwhile Shell bumped up its year-over-year earnings by 56% on a 2% boost in production, much of which was attributable to Qatargas 4 coming on stream, along with an expansion of another project in Canada. Finally, ConocoPhillips' (NYS: COP) results were mixed, reflective of a major makeover that tells me to merely monitor the company until its new structure is more evident. Finally, BP's (NYS: BP) disappointing quarter, its ongoing battles with its obstreperous Russian TNK-BP partners, and CEO Bob Dudley's unproven leadership define a company still not ready for prime time.

It's everywhereLooking specifically at several of the strengths inherent in ExxonMobil, the company clearly provides optimum geographic diversity through its activities in excess of 100 new oil and gas development projects spread across more than 40 countries. Since 2000, such diverse locations as the Middle East, the Gulf of Mexico, West Africa, Australia, and the Caspian have yielded more than two billion oil equivalent barrels.

In January, following years of operating success -- accompanied by frequent political tension -- in developing the Sakhalin-1 project on the aforementioned Sakhalin Island, Exxon signed an agreement with Russian oil company OAO Rosneft to jointly develop the Tuapse Trough area of the Black Sea. The area is thought to contain about 7.3 billion barrels of oil equivalent.

In the U.S., Exxon last year completed the $41 billion acquisition of XTO Energy, which, with 45 trillion cubic feet of gas (primarily in the nation's unconventional plays) instantly placed ExxonMobil atop the industry in U.S. natural gas production and played a major role in last quarter's year-over-year output growth. Beyond that, the company has combined its own exploration and production capabilities in unconventional plays with those it acquired from XTO to initiate shale drilling and fracking in northern Germany.

The company has also developed a concentration in manufacturing and transporting liquefied natural gas, about which my Foolish colleague Dan Dzombak has written knowledgeably. For instance, Exxon is participating in joint ventures that transport LNG from Qatar to Asia.

None of the company's successes would have been possible, however, without its acknowledged technical superiority. Its projects around the world have been designed and supported by ExxonMobil Upstream Technical Computing Company. Indeed, ExxonMobil developed and is constantly refining 3-D seismic imaging, which has vastly increased the likelihood of successful drilling efforts both on land and offshore.

Foolish bottom lineBy now, despite perhaps fending off queasiness resulting from watching the week's rollercoaster market, you've likely noticed that ExxonMobil has been at least temporarily passed by Apple for the top spot in market capitalization. Both are solid companies, but its important to keep in mind that, unrealistic fetishes about rapid development of green energy notwithstanding, oil and gas will likely continue to provide more than half of our energy needs for decades to come.